chapter 3 - overhead you will get this never give up never surrender!

Chapter 3 - Overhead

You will get this

Never give upNever surrender!

Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Charge direct

material and direct labor

costs to each job as

work is performed.

Charge direct

material and direct labor

costs to each job as

work is performed.

Sequence of Events in a Job-Order Costing System

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Calculating and Applying Overhead

1. Calculate a Predetermined Overhead Rate based on Budget Data

2. Charge Actual Overhead to the Overhead account

3. Calculate the applied amount of Overhead $$$$, charge to WIP

4. Post applied Overhead to the Manufacturing Overhead account (above) and WIP

5. Balance in Overhead account is equal to Over/Under Applied overhead

6. Transfer ending balance in Manufacturing Overhead out, leaving a ZERO balance in Manufacturing Overhead

Manufacturing costs that cannot be traced directly to specific units produced.

Manufacturing Overhead

Examples: Indirect labor and indirect materials and indirect manufacturing costs (rent, utilities, etc.)

Examples: Indirect labor and indirect materials and indirect manufacturing costs (rent, utilities, etc.)

Wages paid to employees who are not directly

involved in production work.

Examples: maintenance workers, janitors and

security guards.

Materials used to support the production process.

Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Tiger Co.List of costs:

Budgeted Costs

Direct mtls $ 1,500,000

Direct labor $ 380,000

Sales commissions $ 650,000

Salary of production supervisors $ 350,000

Salary of purchasing dept. $ 300,000

Indirect materials $ 50,500

Advertising expense $ 75,000

Training for production employees on new system $ 62,000

Training for accounting employees on new system $ 20,000

Rent (factory uses 75% of floorspace) $ 510,000

Utilities $ 100,000

Tiger Co.List of costs:

Budgeted Costs

Direct mtls $ 1,500,000

Direct labor $ 380,000

Sales commissions $ 650,000

Salary of production supervisors $ 350,000

Salary of purchasing dept. $ 300,000

Indirect materials $ 50,500

Advertising expense $ 75,000

Training for production employees on new system $ 62,000

Training for accounting employees on new system $ 20,000

Rent (factory uses 75% of floorspace) $ 382,500

Utilities $ 75,000

Budgeted Cost Driver

• For this problem, assume a cost driver of Direct Machine Hours:

• Budgeted Machine Hours = 305,000 hours

• What is your Predetermined Overhead Rate?

Predetermined Overhead rate

$1,220,000/305,000 hours = $4/per what?

_________________

Do we use ACTUAL costs to apply Overhead to WIP?

• NO NO NO NO NO NO NO NO NO NO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Charge to Manufacturing Overhead instead – debit

How much and which accounts?

How do you apply overhead?

Apply overhead to

each job using a

predeter-mined rate.

Apply overhead to

each job using a

predeter-mined rate.

Sequence of Events in a Job-Order Costing System

Direct MaterialsDirect Materials

Direct LaborDirect Labor

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3Manufacturing Overhead

Manufacturing Overhead

Actual amount of the allocation base such as units produced, direct labor hours, or machine

hours incurred during the period.

Actual amount of the allocation base such as units produced, direct labor hours, or machine

hours incurred during the period.

Based on estimates, and determined before the

period begins.

Based on estimates, and determined before the

period begins.

Application of Manufacturing Overhead

Overhead applied = POHR × Actual activity

Tiger Co.List of costs:

ACTUAL Costs

Direct mtls $ 1,490,000

Direct labor $ 364,000

Sales commissions $ 650,000

Salary of production supervisors $ 350,000

Salary of purchasing dept. $ 300,000

Indirect materials $ 50,000

Advertising expense $ 75,000

Training for production employees on new system $ 60,000

Training for accounting employees on new system $ 20,000

Rent (factory uses 75% of floorspace) $ 500,000

Utilities $ 104,000

Tiger Co.List of costs:

ACTUAL Costs

Direct mtls $ 1,490,000

Direct labor $ 364,000

Sales commissions $ 650,000

Salary of production supervisors $ 350,000

Salary of purchasing dept. $ 300,000

Indirect materials $ 50,000

Advertising expense $ 75,000

Training for production employees on new system $ 60,000

Training for accounting employees on new system $ 20,000

Rent (factory uses 75% of floorspace) $ 375,000

Utilities $ 78,000

Mfg. OverheadWork in Process(Job Cost Sheet)

Direct

Materials

Overhead Applied

OverheadApplied to

Work inProcess

Direct LaborIndirect

Labor

Indirect Materials

Actual Applied

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Job-Order System Cost Flows

Other Indirect Costs

How much to Apply?

Tiger, Inc. has a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 305,000 hours during the period but actually worked 290,000 machine hours during the period. How much should Tiger apply?

How much to Apply?

Tiger, Inc. has a predetermined overhead rate of $4.00 per machine hour. Tiger, Inc. expected to work 305,000 hours during the period but actually worked 290,000 machine hours during the period. How much should Tiger apply?

290,000 x $4 = $1,160,000

MOH – Cost flows

Mfg. Overhead

Actual Applied $ 350,000

$ 300,000

$ 50,000

$ 60,000 $ 375,000 $ 78,000

$ 53,000

$ 1,160,000

Is it Over or Under Applied?

Tiger, Inc. had actual manufacturing overhead costs of:

$1,213,000

Tiger, Inc. expected to work:

305,000 machine hours

but actually worked:

290,000 machine hours

MOH – Cost flows

Mfg. Overhead

Actual Applied $ 350,000

$ 300,000

$ 50,000

$ 60,000 $ 375,000 $ 78,000

$ 1,213,000

$ 1,160,000

Mfg. OverheadWork in Process(Job Cost Sheet)

1,190,000

Actual Applied

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

If actual and applied manufacturing overheadare not equal, a year-end adjustment is required.

Job-Order System Cost Flows

1,190,000$1,213,000

MOH – Cost flows

Mfg. Overhead

Actual Applied $ 350,000

$ 300,000

$ 50,000

$ 60,000 $ 375,000 $ 78,000

$ 1,213,000

$ 53,000

$ 1,160,000

Actual costs are Greater than Applied Rate:

Is this Over or Under Applied????

MOH – Cost flows

Mfg. Overhead

Actual Applied $ 350,000

$ 300,000

$ 50,000

$ 60,000 $ 375,000 $ 78,000

$ 53,000

$ 1,160,000

Overhead is UNDER applied

Overapplied and Underapplied Manufacturing Overhead

Tiger Co’sMfg. Overhead

Actualoverhead

costs

$1,213,000

$53,000 underapplied

Tiger Co’s Cost

of Goods SoldUnadjusted

Balance

$53,000

$53,000

AdjustedBalance

OverheadAppliedto jobs

$1,160,000

Over/Under Applied

• Actual $$$ > Applied $$$ = Under Applied or Debit Balance (unfavorable, increases COGS when you adjust)

• Actual $$$ < Applied $$$ = Over Applied or Credit Balance (favorable, decreases COGS when you adjust)

What affect does this adjusting entry have:

• On COGS (increase or decrease)

• On Net income (increase or decrease)